As economic uncertainty continues to challenge investors, many Canadians are questioning whether traditional safe-haven assets like gold and newer alternatives like bitcoin can genuinely protect their portfolios during market downturns. This concern is particularly relevant for retirees seeking to preserve their life savings.
An 83-Year-Old Investor's Dilemma
Irene, an 83-year-old Canadian investor, recently posed a crucial question to Financial Post's FP Answers initiative. She holds investments in guaranteed investment certificates (GICs), stocks, and has also diversified into bitcoin and gold royalty exchange-traded funds (ETFs). While these alternative assets have performed well, she questions whether they truly serve as effective hedges against financial crashes and currency devaluation.
Her concerns extend to practical matters of ownership. "I do not want, and don't know how, to invest in physical bitcoins and am not sure whether physical gold is safe when stored at a bullion dealer," Irene explained, seeking professional guidance on navigating these complex investment vehicles.
Understanding Gold Investment Options
Portfolio manager John De Goey, with Designed Securities, clarifies the different approaches to gold exposure. Gold royalty ETFs, which invest in gold-producing companies, are generally classified as high-risk investments. The marginal cost of gold production remains relatively stable, meaning investors can experience either substantial profits or significant losses depending on gold price fluctuations.
For those seeking more moderate risk, gold bullion ETFs simply track the price of gold and are available in both currency-hedged and unhedged formats. These products address Irene's concern about currency denomination to some extent and are suitable for most investors. De Goey currently uses this approach in his practice, noting that "the risk rating makes it suitable for just about everyone."
The third option—directly held bullion—eliminates management fees but introduces challenges around secure storage and insurance. De Goey characterizes this approach as favored by "ultra-traditionalists and conspiracy theorists" and doesn't personally recommend it for most investors.
The Psychological Power of Gold
There's no denying gold's historical role as both an inflation hedge and protection against geopolitical instability. However, De Goey acknowledges the somewhat paradoxical nature of gold's value proposition. "There is no compelling reason for why this is the case, other than to say that 'it works because people think it works,'" he observes.
This collective belief supports gold prices despite the metal generating no income and having limited commercial utility. Still, De Goey considers gold appropriate for most portfolios in today's economic environment, recommending a five to ten percent allocation to optimize risk-adjusted returns.
Bitcoin: Digital Gold or Speculative Asset?
The analysis of bitcoin reveals striking similarities to gold's investment thesis. Cryptocurrencies lack traditional underlying value based on investment merit, yet market participants perceive them as valuable. As long as this perception persists, bitcoin and similar digital assets will be viewed as potential hedges against market crashes.
De Goey emphasizes the critical distinction between perception and reality in cryptocurrency markets. "The perception of value seems to be real and the thesis works—until it doesn't," he cautions. The fundamental uncertainty lies in the fact that we've never experienced a genuine market crash while large numbers of investors held cryptocurrencies, making their behavior during severe downturns unpredictable.
Both assets ultimately rely on collective belief in their value preservation properties. While gold has centuries of tradition supporting its status, bitcoin's track record remains comparatively brief. For Canadian investors like Irene, understanding this distinction—and the inherent uncertainties in both approaches—proves essential for making informed decisions about portfolio protection strategies.
